GALBRAITH: Here's Why We Should LOWER The Retirement Age

Last night, Goldman Sachs CEO Lloyd Blankfein came out of the CEO
meeting with President Obama and said that the President's plan
to avert the fiscal cliff was "very credible."

It's still not clear what mix of spending cuts and tax hikes
Obama is focusing on, but we do know that Blankfein, like many
other CEOs,
thinks that an increase in the retirement age is something
that we should be shooting for as a way to alleviate the
perceived entitlement crisis.

This is actually common conventional wisdom (we're living longer,
we have a debt problem, so let's modestly increase the retirement
age), but there are some holdouts who disagree.

We talked to Galbraith on the phone today to discuss this idea,
as well as his assessment of the Fiscal Cliff talks and
entitlement (a word he hates) situation in general.

He still likes this idea. With unemployment near 8%, he still
thinks that it makes sense, at least temporarily, to reduce the
retirement age, to let people get benefits earlier, and to clear
up the job market.

He explains:

My argument is that you have a phenomenon which is very well
known called the Baby Boom which is out there and the Baby Boom
is a portion of older workers who are approaching, but in many
cases are not at, the retirement age. They are, particularly
those who have been working in real jobs, I'm not talking about
professors or journalists, but people who actually - you know,
move boxes, inventory, or stand at checkout counters for a
living. When unemployed, they have a very difficult time getting
a new job and early retirement is intrinsically attractive.

Why aren't they taking it? Possibly because it's not attractive
enough, possibly because they're a little too young. So the
solution is to make the early retirement available for a limited
period, let's say three years...and let the people who take it at
62 get a better deal than they get now so that a higher fraction
of the working population will take it at 62.

But what about the general entitlement problem, and all the debt
we're drowning in?

Galbraith calls this "propaganda" that's been pushed for decades
by the same people, who have made predictions that have never
come true. He specifically called out old writings (from the '80s
and '90s) of anti-debt activist Pete Peterson.

The whole notion that there's this great deficit crisis which can
only be dealt with by cutting SS, Medicare, and Medicaid, that's
just - it's a relative recent front in a very old propaganda war.
People who have been, for decades, blathering on about the
disaster in SS, Medicare, and Medicaid. I highly recommend the
back issues of the New York Review Of Books, which lists Peter G.
Peterson, who prowled on about this.

If there is a problem, he says, it's not the government's
expenses per se, but that costs for covering the elderly's
healthcare are expensive regardless of who's paying for them:

If you're asking whether there are problems with Medicare and
Medicaid, the standard answer on that is health care costs are
the problem, and that is not dependent upon whether or not you
are on a private or public insurance scheme. In fact, Medicare
pays less to providers than private insurance does. The reason
doctors accept Medicare patients is that unlike private insurers,
Medicare actually writes the checks and pays people, which
doctors like. I suppose you've encountered doctors who have had
problems getting cash out of insurance companies, if you haven't,
I'll say you haven't encountered a doctor.

The key point

which he emphasized over and over again is that changing who pays
for people doesn't change the burden. And if anything, if you're
worried about generational dependency, you should be in favor of
the current structure of Social Security, which makes workers set
aside money for their retirement, so that they're not dependent
on their children.

Galbraith also has a great rebuttal to those scary CBO charts
showing entitlement costs surging, and swamping GDP, putting the
US on a Greece-like debt-to-GDP ratio. Bunk says Galbraith. Those
aren't macroeconomic forecasts, but just "CBO baselines" that are
used for scoring laws. The reality, he says, is that there's no
way for healthcare costs to surge and get so big while not also
boosting nominal GDP significantly, meaning that the ratios can't
actually get that bad.

Below is the full transcript of James Galbraith's Interview.
Big thanks to Lucas Kawa for transcribing the
interview.

--------------------------------------

BI: So one of the things that people are talking about as
a Fiscal Cliff solution, or as part of the eventual Grand Bargain
that they're going to reach, is an increase to the retirement
age. I know that you've written, contrary to everyone, that we
should do the exact opposite: Lower the retirement age. What's
your argument?

JG: First of all, an increase in the retirement
age is a benefit cut, and it's a benefit cut that is targeted at
the most vulnerable, lowest income part of the population because
what happens in Social Security is about two-thirds of the
eligible population takes it at 62, and if you raise the
so-called retirement age to 67 that means you'll get a deeper
discount when you take it at 62. So it's a direct benefit cut.
People take it at 62 because they're unemployed to begin with —
that's a good reason, you need the income — or because they've
been working for forty years in some nasty job that requires
standing up all day with a back brace and they're tired out.
Either way, they're targeting people you shouldn't target.

Social Security, for the moment, appears to be off the table. But
one also hears harsh cuts on Medicare — increasing the
eligibility age of Medicare is a partial privatization that
requires you to retain your private insurance, if you have it,
for an extra few years and that is a privatization. That's a kind
of egregious maneuver.

My argument is that you have a phenomenon which is very well
known called the Baby Boom which is out there and the Baby Boom
is a portion of older workers who are approaching, but in many
cases are not at, the retirement age. They are ... those who have
been working in real jobs, I'm not talking about professors or
journalists, but people who actually, you know, move boxes,
inventory, or stand at checkout counters for a living. When
unemployed, they have a very difficult time getting a new job and
early retirement is intrinsically attractive.

Why aren't they taking it? Possibly because it's not attractive
enough, possibly because they're a little too young. So the
solution is to make the early retirement available for a limited
period, let's say three years ... and let the people who take it
at 62 get a better deal than they get now so that a higher
fraction of the working population will take it at 62.

If you could work out a formula that would be attractive to a lot
of people, they would move around in the labor force and those
jobs would open up in the course of events and businesses would
fill them with younger people who are all trying to get work.

But you have a situation in which the employment-to-population
ratio has fallen by five percentage points from its peak in 2000,
and there's no sign of its recovery. This would do two things: It
would move people who are only staying in the labor force for
financial reasons or because they're unemployed and need to keep
looking for jobs to qualify for unemployment insurance, move them
into retirement so they can plan their futures in a much more
stable, comfortable way, and it would also open up employment for
young people who are desperate to get it.

BI: So this is a temporary thing — do you think that the
current age of retirement would be generally fine to
keep?

JG: There's no reason to extend the current age
of retirement. People don't actually have to retire — the notion
that the age of retirement is the age at which you get kicked out
is not correct. Now, there are people who want to work longer ...
(or) employers who want to keep their older workers.

All they have to do is a get a little inducement. It's not
difficult. We don't need to manipulate the Social Security scheme
in order to provide workers for employers — if I've got a
business and want to keep my employees from retiring, I'd give
them a little bonus or promise them one. That's not difficult.

BI: I first read your piece on earlier retirement in
early 2011. The economy has improved since then. Unemployment has
dropped significantly in the past two years. But would you still
think that, given the state of the current economy, that you'd
like to see a temporary reduction in the SS retirement
age?

JG: I still think that at 8 percent
unemployment, it's worth looking at. Obviously, I suggested this
as an emergency measure in the depth of the crisis, as it would
have been even more helpful and pulled a lot of people out of
unemployment much more quickly and made the whole adjustment much
less painful. As time goes on, 20 years from now we'll all be
dead, so the problem will be moot. But for the moment I still
think it's worth looking at, yes.

BI: Bigger picture — does the U.S. have an entitlements
problem?

JG: Well we have lots of people who feel that
they're entitled — like the Republican who ran for the presidency
last year — but I don't like the term. If you're asking whether
SS poses a financial problem for the U.S. government, the answer
is no. If you're asking whether there are problems with Medicare
and Medicaid, the standard answer on that is health care costs
are the problem, and that is not dependent upon whether or not
you are on a private or public insurance scheme. In fact,
Medicare pays less to providers than private insurance does. The
reason doctors accept Medicare patients is that unlike private
insurers, Medicare actually writes the checks and pays people,
which doctors like. I suppose you've encountered doctors who have
had problems getting cash out of insurance companies, if you
haven't, I'll say you haven't encountered a doctor.

BI: From a pure fiscal standpoint, SS and Medicare are
not things that we should be worried about?

JG: The whole notion that there's this great
deficit crisis which can only be dealt with by cutting SS,
Medicare, and Medicaid, that's just — it's a relative recent
front in a very old propaganda war. People who have been, for
decades, blathering on about the disaster in SS, Medicare, and
Medicaid. I highly recommend the back issues of the New York
Review Of Books, which lists Peter G. Peterson, who prowled on
about this.

BI: What year was he writing about that stuff?

JG: Oh, all through the '80s and '90s, just go
back to the back issues, you'll find Pete Peterson periodically
appears on those pages with a long essay on the subject.

BI: As part of a fiscal cliff deal, is there anything
that should be done on the spending side?

JG: The one interesting thing on the fiscal
cliff was that it codified that defense spending is coming down,
so it's an opportunity to really examine how to do this in an
intelligent way. The defense budget is coming down; there's no
way we're going to maintain the level of expenditures we've had,
either for the Iraq and Afghanistan operations or for the
procurement of fancy equipment that can actually never be used.
The rationalization of the national security establishment so
that ... what we pay for are things we actually use would be a
very very useful thing to do. On the domestic side, I don't
particularly know what the consequences of the sequesters will
be, but I think that, depending on how they're handled, we may
discover that, for example the air traffic control system gets
jammed up and Congress will decide that maybe this is a pretty
dumb thing to do.

BI: When people look at these CBO charts showing national
debt-to-GDP soaring into the future if everything is left
unchecked, obviously that prompts a lot of knee-jerk concern that
this is inherently unsustainable for some reason. What is your
response to that?

JG: First of all, I say read the fine print and
you will see that the CBO itself says that these charts are not
macroeconomic forecasts. They are baselines. Their function — the
reason the CBO does them is to provide a common framework for
evaluating legislation. The CBO's function is to cost-out
legislative proposals. In order to do that in a fair way, you
have to have a common baseline for everyone. And that's what the
baseline is.

The baseline itself doesn't have to be a good macroeconomic
forecast. But if you use it as such, and it's been sort of
conscripted into that by a lot of people who, maybe, are
negligent or irresponsible — then you have to ask: Is this
baseline internally consistent? And obviously it's not. The fact
that it shows that over a long period of time, health care costs
rising to 30, 40, 50 percent of GDP, and then with their costs
continuing, rising more rapidly than GDP, but overall inflation
standing at 3 percent, even though the share of health care costs
rises and rises and rises, is an absurdity. And it'll never
happen.

BI: Explain that further.

JG: Let's flash forward half a century. If
health care costs are 50 percent of GDP, then their weight in the
inflation index will be 50 percent. And their rapidly rising
costs will be reflected in inflation, in which case inflation
will not be 3 percent. It's not difficult.

BI: Are you saying inflation will be much higher,
therefore GDP will be much higher?

Inflation will be much higher, in which case nominal GDP would be
much higher, in which case the effective GDP ratio will not be
what the CBO is predicting. I'm not saying it's a good thing, but
even before you reach that point, if medical care costs continue
to rise the way the CBO projects, other costs will weigh up to
that. But if your doctor asks for $50,000 for a tonsillectomy
you're going to be asking your boss for $250,000 in salary. It's
just not reasonable to think that the medical sector can get away
with extracting a much larger share of our GDP than it does
anywhere else in the world, and the reality of course is that it
isn't. The more you see that the cost curve is bending, the
increase in health care costs is much lower than the CBO is
projecting.

BI: This is a crucial point, that there is no way for
these CBO debt-to-GDP charts to actually be accurate because
there is no way that you could have this one sector of the
economy swamping everything else.

JG: Correct, correct, absolutely correct. And
the second thing which is in there — and the CBO has adjusted
this since four years ago — is the assumption that interest rates
on the federal debt is going to go up higher than the growth rate
of GDP. This is compounding over time, which drives up the share
of debt-to-GDP in a very artificial way. Can't happen; won't
happen.

BI: Let's wrap up on one thing. You make the argument
that on the pure, fiscal, debt-to-GDP standpoint that the fear is
mostly propaganda. What about the general idea of a generational
burden — the idea that we'll have so many people retiring and,
dollars aside, that not raising the retirement age will create
this huge class of people who will be a burden on fewer and fewer
workers, and that this is unsustainable? Just from a pure
resources perspective.

JG: Okay. Two answers to that. One is that, of
course, we don't need that many workers — the numbers that we
need to support us in some level of comfort has been declining
everywhere for centuries — agriculture first, manufacturing now.
So this notion that we're not going to maintain the level of
workers to support the population is belied by a very long
history. Second of all, the so-called dependency ratio includes
both the elderly and the young. The number of elderly goes up,
the number of children goes down, which may not be a good
thing... But the third point is that the elderly are there. The
only choices you have are to support them or not support them. If
you don't support them through a common insurance scheme, then
where does the burden fall? It falls — to those who have families
— it falls on them. For those who don't have families, it's a
really tough situation. And the point about the social insurance
scheme is that it spreads the burden, not in relationship
to whatever your particular family situation happens to be, but
in relationship to your earnings history. And it spreads the
burden of paying for it through the payroll tax, not in
relationship to whether you happen to have parents ... but
whether you are working and in takes it out of your paycheck in
the beginning. That's all it does. It doesn't do anything else
besides that. The notion that somehow you can avoid the burdens
of having successfully expanded human life span to such and such
years is wrong. You can't avoid it. The question of what's the
nicest, gentlest, most decent way [to care for our elderly
population]. With Social Security and Medicare we did an awfully
good job.

We've eliminated poverty and basically dramatically reduced the
risk of medical bankruptcy amongst the elderly ... We also make
for everyone who has elderly parents — we've relieved the burden
on their kids enormously. The idea behind SS is that if you're a
working parent, you focus on your children. That's who you put
your money into. Your parents are taken care of.